September 14, 1998

To:Strategic Policies and Priorities Committee

From:Audit Committee

Subject:Use of Long Term Consultants

Recommendations:

The Audit Committee on September 11, 1998, recommended to the Strategic Policies and Priorities Committee and City Council that:

(1)the report (August 31, 1998) from the City Auditor respecting the use of long term consultants, be adopted; and

(2)the firm of Gore & Storrie Limited be put on notice that the City of Toronto requires from them, audited statements of the summary of expenses covering the five-year period from 1993 to 1997, within sixty days of approval of this action by Council.

The Audit Committee advises that it has requested the City Auditor to report back to the Audit Committee on the possibility of a clause being inserted into new construction contracts that if audited financial statements are not submitted within a certain period of time, a financial penalty will be assessed.

Background:

The Audit Committee had before it a report (August 31, 1998) from the City Auditor, reporting as requested by the Works and Utilities Committee on the use of consultants at the Main Treatment Sewage Plant and to look at the issues around long term use of any particular consultant by the municipality.

City Clerk

Ina Robinson 392-7031

Attachment

Item 17

Copy sent to City Auditor

August 31, 1998

To:Audit Committee

From:City Auditor

Subject:Use of Long Term Consultants

Recommendations:

It is recommended that:

(1)All consulting contracts should be awarded in accordance with By-Law No. 7-1998 and in accordance with City of Toronto policy;

(2)In accordance with past practice, a report be prepared for the information of Council by the Commissioner of Works and Emergency Services indicating the status of all long term consulting contracts and related expenditures;

(3)The standard report on the status of all long term consulting contracts and related expenditures be expanded to include all future commitments, as well as the expected completion date of the appropriate contracts;

(4)All consultants with long term contracts should be required to provide annual financial statements accompanied by a certificate of an auditor licensed under The Public Accountancy Act stating that, in his opinion, the fees charged to the City for the year are appropriate;

(5)The Chief Administrative Officer be requested to report to Council every six months on the use of consultants by the City and all its Agencies, Boards and Commissions;

(6)All departments be requested to identify and report to the City Finance Department consulting arrangements with individuals including incorporated individuals. In addition, Finance staff evaluate all such contracts to determine whether or not an employee/employer relationship exists. If this relationship does exists, appropriate employee deductions should be made;

(7)The City Solicitor be requested to report on whether or not the extent of staff involvement in various consultant's design projects would impact any future legal claim in relation to design issues; and

(8)This report be forwarded to the Works and Utilities Committee for their information.

Background:

At its meeting on March 25, 1998, the Works and Utilities Committee requested that the Audit Committee examine the use of consultants at the Main Treatment Sewage Plant. At its meeting held on May21,1998, the Audit Committee requested:

1. the City Auditor to look at the issues around the long term use of any one particular consultant by the municipality; and

2. the City Auditor to report on whether or not the design of the Main Treatment Plant had been approved by staff of the municipality.

The Audit Committee also requested the City Solicitor to report to the Works and Utilities Committee on what recourse is available to the municipality to correct the design problems at the Main Treatment Plant at the consultants' expense.

Our examination included a review of Corporate policies and procedures, supporting documentation related to the use of consultants, discussions with department representatives, and other audit procedures wherever appropriate.

Comments:

Long Term Use of Consultants

The majority of significant long term consulting contracts exist in the area of the Sewage Treatment Plants of the Works Department. For this reason, the major focus of our review has been in this particular area. We have, however, identified three additional long term consulting agreements in the Solid Waste Division of the Works Department. We have a number of comments on these contracts also. There may be other long term contracts in existence at other departments, particularly in relation to long term transportation projects. We have not identified these at the present time. However, if our ongoing audit work identifies other long term consulting contracts, we will review them at that point and report to the Audit Committee appropriately.

The Works Department of the former Municipality of Metropolitan Toronto signed a number of consulting engineering contracts in the early to mid 1970's in connection with the Main Treatment Plant at Ashbridges Bay, the Highland Creek Treatment Plant and the Humber Treatment Plant. We have been advised that These contracts were awarded subsequent to a competitive bidding process at that time. Details of these contracts were as follows:

Date SignedConsultantProject

November 1972Gore & Storrie LimitedStage III of the Construction of the Main

(Now operating as CH2MTreatment Plant

Gore & Storrie Limited)

May 1973James F. MacLaren LimitedStage III of the Construction of the Humber

(Now operating as FencoTreatment Plant

MacLaren Engineers, Inc.)

June 1976Proctor and Redfern LimitedStage IV of the Construction of the Highland

Creek Treatment Plant

Prior to 1990, these consultants were awarded contracts in relation to work at each of these locations. Generally, this work did not go out to tender but was awarded to each of the above consultants mainly in recognition of the familiarity and expertise each consultant had in relation to the location.

In September 1990, the former Metro approved and adopted a policy for the selection and retention of architectural and professional engineering consulting services. The intent of the policy was to ensure that individuals and firms providing architectural and professional engineering consulting services have fair access to assignments. Provisions relating to the policy are outlined in AppendixA attached.

The long term agreements relating to each of the Consultants remain in effect on a limited basis with respect to works designed prior to 1990 but not yet built. We have been advised that for continuity of technical expertise as well as for economic reasons, the Department has deemed it beneficial to retain the same engineering firm that performed the detailed design to provide administration and site supervision during construction. It is for these reasons the Agreements remain in effect.

The work required from each consultant was similar. Specifically it included:

(1)Preparation of detailed design, contract plans, specifications and tenders;

(2)General administration during construction including approvals of alternatives in methods and materials, approval of shop drawings, related advice and correspondence together with other matters normally related to those functions of general administration which are performed in the office of the Consultant;

(3)Resident services during construction of the work including placing on the site of the work such resident consultants and inspectors as the Commissioner deems necessary to ensure that the execution of the work is in accordance with the plans and specifications therefor;

(4)Availability of such representatives of the Consultant as the Commissioner deems necessary to serve as witnesses and to assist in the preparation of evidence in any lawsuits that may arise out of the construction of the work;

(5)Such plant startup services of operational assistance as the Commissioner deems necessary;

(6)Pre-design services; and

(7)Periodic plant scale reports.

Each of these agreements was approved by the former Metro Council as have the many revisions to the agreements over the years. The revisions relate to fee increases, changes in criteria for determining maximum payments, computer charges, limits on design fees, etc.

Our review of new design/study projects commissioned by the Works Department at the Main Treatment Plant over the last five years has revealed that a total of 15 new projects were awarded. The award of 14 assignments was in compliance with the former Metro approved policy for the selection and retention of architectural and professional services. An exception was the contract awarded to Gore & Storrie on the Bio-solids Truck Loading Facility. We are advised by management that in order to meet specific timetables, as specified by Council, the normal selection process was bypassed and the contract was awarded to Gore & Storrie Limited under the provisions of their existing long term engineering services agreement with the Metropolitan Corporation. The cost of the project was in excess of $500,000 which included the feasibility study, design of the facility and administration and site services during construction. The award of this particular engineering consulting assignment was not reported to Council.

Fees to be paid to each of the consultants are outlined in general terms in the original agreements and are specific in terms of actual services to be rendered. Each design assignment has a maximum fee level as provided for in the agreement. Fees are based on a percentage of the total construction costs of the project. In any event, each agreement contained a provision which required both parties to renegotiate certain components of the fee at five year intervals. To date, no party has initiated a renegotiation of engineering fees. Due to the numerous contracts awarded in connection with the agreements, it would have proved extremely difficult and time consuming at this time, to attempt to verify total fees paid with the original agreements.

As of March 1998, the following cumulative payments have been made to each of the consultants:

ConsultantAmount Paid

Gore & Storrie Limited $70,586,000

James F. MacLaren Limited$28,049,000

Proctor and Redfern Limited$12,742,000

Based on discussions with staff, estimated future commitments are as follows:

ConsultantCommitments

Gore & Storrie Limited$ 2,405,000

James F. MacLaren Limited$ 1,735,000

Proctor and Redfern Limited$ 710,000

The status of these long term agreements and related expenditures have been reported annually to Council. The last report was made to the former Metro Environment and Public Space Committee in January 1997. We suggest that an updated report be issued for the information of Council as soon as possible.

There are a number of issues relating to these long term contracts which require clarification or additional management action. Each of the agreements contains a provision relating to final contract costs which indicates that "Upon completion of all the services performed by the Consultant pursuant to this Agreement, the Consultant shall submit to the Commissioner a final statement, duly certified under oath by a senior professional engineer who is a duly authorized representative of the Consultant setting forth in detail all services performed and all disbursements claimed under this Agreement and at the time of submission of such final statement or within a reasonable time thereafter the Consultant shall submit to the Commissioner the certificate of an auditor duly licensed under The Public Accountancy Act to the effect that in his opinion the charges set forth in such final statement are properly chargeable under this Agreement."

In 1995, during our audit of the former Metro Works Department, we recognized the impracticality of having to provide an auditor's statement covering an unreasonable period of time. For this reason, we recommended that management should request that the three consultants provide frequent audited statements. Based on this recommendation, management requested each of the three consultants to provide audited statements for expenditures incurred up to December 31, 1994.

James F. MacLaren Limited and Proctor and Redfern Limited submitted audited financial statements in accordance with the 1995 requirements of the Department. Subsequent to these initial audits, James F. MacLaren Limited has been providing annual audited statements, the latest of which was for 1997. Proctor and Redfern Limited have not provided financial statements since their initial submission.

To date, no audited statements have been received from CH2M Gore & Storrie Limited. We have been advised by management that a letter was received from CH2M Gore & Storrie Limited informing them that audited financial statements covering the 5 year period from 1993 to 1997 will be provided in the near future. In addition, effective 1998, the company will be providing audited statements annually. We suggest the Department request all consultants with long term agreements to provide audited financial statements annually.

Other Long Term Consulting Contracts

The Solid Waste Management Division of the Works Department also has long term contracts with three firms for engineering and consulting services relating to the Keele Valley Landfill Site. The agreement limits have been revised through reports to appropriate Committees and Council. These firms are:

(1)Conestoga-Rovers & Associates Ltd. (agreement dated August 1983 and expiring on April1,1998). OnMay13,1998, Council adopted Clause No.8 of Report No.4 of the Works And Utilities Committee, authorizing the amendment of the agreement to December31,1999 at payment limit of $2,892,790 (Payment to date $2,508,020);

(2)Dixon Hydrogeology (agreement dated July 1984 and expiring on December 31, 1999) at payment limit of $2,685,100 (Payment to date $2,280,697); and

(3)Golder Associates (agreement dated May 1984 and expiring on December 31, 1998) at payment limit of $7,176,255 (Payment to date $7,170,788).

These three consulting firms were retained at the inception of the Keele Valley Landfill Site. According to the Department's reports to Council, their contracts were extended for provision of services mandated by conditions of the Provisional Certificate of Approval governing the development and operation of the Keele Valley Landfill Site at its progressing stages of development. Given their extensive knowledge of the landfill site, and for continuity between the engineering design, the approval process required by the Ministry of Environment, and implementation of present and future work, department management recommended continuing employment of these consulting firms. These recommendations were accepted by the former Metro Council.

Services provided by these consulting firms include the following:

(1)Conestoga-rovers & Associates Limited for general consulting services, landfill gas consulting services including gas utilization and ambient air monitoring, leachate disposal, moisture recirculation, final cover, progressive rehabilitation and site closure requirements at the Keele Valley Landfill Site;

(2)Dixon Hydrogeology Limited for consulting services with respect to groundwater monitoring/modeling, purge well systems, construction supervision/monitoring, producing associated technical reports related to the development of the site and ongoing monitoring and reporting required by the Ministry of Environment and the Certificate of Approval; and

(3)Golder Associates for provision of consulting services with respect to design of the final cover, on site supervision of liner construction, borrow pit development and extraction, geotechnical testing, design and installation of monitoring devices in and under the clay liner, interpretation of data generated, devising geotechnical programs as required, and reporting on a quarterly and annual basis to the satisfaction of the department and the Ministry of Environment.

To date, no audited statements have been received from these three consulting firms. We have since advised management to request from them audited financial statements covering the 5 year period from 1993 to 1997 and annual audited statements in the future.

At this point, we are not aware of other long term contracts in the Works Department of the former Municipality of Metropolitan Toronto or at the other amalgamating municipalities.

General Concerns in Relation to Long Term Contracts with Consultants

We have raised concerns in prior years relating to arrangements that exist with staff who are employed on a contract/consulting basis. As a result of this arrangement, payment made to these individuals are not subject to statutory payroll deductions. Irrespective of any contractual arrangement which the City may have, Revenue Canada will deem these individuals to be an employee if an employer/employee relationship exists.

Significant tax consequences could arise where an employee fails to withhold income tax when required to do. These penalties are as follows:

(1)A 10% penalty for failing to withhold; and

(2)Interest on a daily basis at approximately Treasury Bill rates plus 2%.

The status of all contracted individuals should be reviewed. If an employee/employer relationship

does exists, then Revenue Canada's directives pertaining to salary deductions should be complied with.

Staff Approval of Design at the Main Treatment Plant

The Audit Committee requested the City Auditor to report on whether or not the design of the Main Treatment Plant had been approved by the staff of the municipality. As the Main Treatment Plant has been operating for a number of years, numerous design projects have been commissioned for the Plant. Rather than review each individual project, we have validated the process by a review of the design procedures used for the Bio-Solids Truck Loading Facility.

At its meeting on October 12, 1994 of the Works Committee, Metro Council authorized the design and construction of a biosolids truck loading facility at the Main Treatment Plant at a cost not to exceed $3.85 million. This demonstration facility, with an initial target commencement date of June1,1995, is designated for the storage and loading of dewatered biosolids to haulage trucks for removal of biosolids off site. For a minimum of five years, this demonstration program is to utilize approximately 50% of the plant's sludge for beneficial reuse. It was anticipated that if the results of the trial proved successful, a new full scale facility would be constructed to receive all the plant's sludge.

Results of our discussions and review of documentation have revealed that the Works Department, in commissioning Gore & Storrie Ltd. to conduct a feasibility study on the Bio-Solids Truck Loading Facility in August 1994, specified the study to include design details of a facility to be located south of the Incinerator Building. The final contract drawings prepared by Gore & Storrie were dated December 1994. The facility became operational in August 1996.

According to minutes of regular meetings and correspondence at the time, Works Department staff were closely involved in reviewing the design of this new demonstration facility. In particular, there were discussions on the many challenges facing the project (e.g. space constraints, odor control initiatives and truck loading arrangements). We have been advised that the intent of staff's involvement is to highlight potential operational and maintenance concerns so that they are addressed at the design phase. Management advised us that while relying on the consultant's professional expertise, the Works Department representatives primarily review the consultant's finished products (such as final design drawings, tender documents, operation manual) for obvious omissions. The final design drawings bear the professional stamps and approval of the consultants.

The existing long term agreement under which the contract with Gore & Storrie Limited was commissioned, also stipulates that the Metropolitan Corporation has the rights "to recover damages from the consultant arising from the failure of the consultant to perform such professional services in accordance with the terms of the agreement". Based on our review, final design approval and responsibility is that of the consultant. While staff may be involved in the design process, it is the consultant who ultimately signs off in a professional capacity on all such projects. Whether or not the extent of staff's involvement would impact any future legal claim in relation to any design issues is a legal matter and should be reviewed by the City's Legal Division.

Contact Name and Telephone Number:

Rafiq Dosani 392-8438

Jeffrey Griffiths

City Auditor

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